Phase two is a go: What do the EU Council’s conclusions means for Brexit?

Securing ‘sufficient progress’ in phase 1 was a big win for the UK, but the next stage will mean new difficulties, while many of the phase 1 issues still remain...

The dust has finally settled after the flurry of activity around the Brexit negotiations. The DUP have been placated, the Republic of Ireland has kept its veto in its pocket (for now), and David Davis has rowed back from arguments about the legal validity of negotiation text. As a result the Prime Minister has come away from last week’s European Council with a formal agreement of the move to phase two of the negotiations. After all the last minute diplomacy, that is certainly cause for celebration.

But, as the Council’s conclusions making the ‘sufficient progress’ judgement official make clear, those celebrations may yet end in a very big hangover.

For starters, the conclusions lays bare what many have said for some time- that the EU has no interest in negotiating a trade deal during the Article 50 process. The Council’s conclusions state:

“...an agreement on a future relationship can only be finalised and concluded once the United Kingdom has become a third country, the Union will be ready to engage in preliminary and preparatory discussions with the aim of identifying an overall understanding of the framework for the future relationship.”

There is a lot to be read into this statement, but it is a big blow to the chances of the UK achieving its preferred approach of seeking substantive talks on a Free Trade Agreement (FTA) with a view to having a comprehensive deal ready to be signed the moment we leave in March 2019.

The Council is not in any hurry to even begin these discussions, with the conclusions calling for further preparatory work with a view to adopting new negotiation guidelines on the future relationship in March 2018. Any Withdrawal Deal will need to be agreed by October 2018 in order to have time for it to be ratified by EU Member States before the end of the Article 50 process. The delay to agreeing negotiation guidelines appears to be a clear statement that the Council will continue to limit what Michele Barnier and the EU Commission can negotiate, effectively running down the clock on the UK’s suggested approach.

All this means that there is a very real risks of there being a gap between the end of Article 50 in March 2019 and the commencement of any FTA deal.

That means securing a transition agreement is all the more important, and here there is some good news for the UK. The Council says it will adopt guidelines on negotiations for a transition period in January, showing that they are prioritising transition over the future partnership and that there is real hope of a swift agreement to a transition of ‘about two years’.

The likely terms of such a transition are rigid, with references to a “level playing field” between the EU and the UK. There are specific references to the ‘status quo’ transition that techUK and others have called for, where the UK continues to be within the Single Market, Customs Union during transition. That is a welcome step for business, but is likely to be a source of political dispute as the full scope of what it means in practise is put further under the spotlight early next year. For those looking for the perfect primer for what FTA options exist, the report by the Institute for Government released today makes excellent Christmas reading.

However, there is one significant sting in the tail of the Council’s position on transition. While the UK will be bound by the acquis of EU law, the Council is clear that during a transition, the EU will be a third country and will no longer “participate in the decisions-making of the Union bodies, offices and agencies”. This is a potential point of real conflict. Not only does it risk the UK being ‘rule takers’ for at least two years of transition, with little say over new EU rules adopted in that time, but it also means securing ongoing regulatory participation, including ‘observer status’ on key bodies such as BEREC in any final deal may be difficult to achieve. Pushing back against this proposal will be important in negotiations over transition.

Finally, the Council’s conclusions put the ball back in the UK’s court, stating that the UK must provide “further clarity on its position on the framework for the future relationship”. This alludes to the discussions that have begun at Cabinet this week about what the UK actually wants, be it the ability to diverge from EU regulation or to remain closely aligned. For tech, it is clear that alignment is key, particularly on issues such as the free flow of personal data where the EU is increasingly setting the global standard. However, there is no doubt that, as negotiations progress, the trade-offs between alignment and divergence are likely to become increasingly stark, both in economic terms and for the political splits within Cabinet and beyond. Expect to hear a lot more about this over the coming months.

The dust may have settled on phase one, but all told, 2018 is shaping up to be another year dominated by Brexit. I will leave it to others to decide whether that is cause for further celebration or not!

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